DOCUMENT RESUME

00291 - [A1051787]

Financial Disclosure Systems in Banking Regulatcry Agencies.

FPCD-77-29; B-118535. March 23, 1977. '9 pp. * appendices (7

pp.) ·

Report to the Congress; by Elmer B. Staats, Comptroller General.

Issue Area: Personnel Management and Compensation (300).

Contact: Federal Personnel and Compensation Div.Budget Function: General Government: Central Personnel

Management (805).organization corcerned: Office of the Comptroller of the

Currency; Department of the Treasury.Congressional Relevance: House Committee on Banking, Currency

and Housing; Senate Coammittee on Banking, Housing and Urban

Affairs; Congress.Authority: 12 U.S.C. 1 et seq. 18 U.S.C. 212, 213, Executive

Order 11222. 31 C.F.R. 0.735-70 et seq.

The Office of the Comptroller of the Currency (OCC)

must make sure that its employees Maintain the highest ethical

standards wben doing their work. An effective financial

disclosure system can help provide such assurances. However, the

Comptroller has not yet developed the disclcsure system to that

point. Findings/Conclusions: The OCC financial disclosure

system needs: adequate criteria for identifying positions where

incumbents should file disclosure statements; effectiveprocedures with adequate criteria for reviewing statements and

identifying conflicts of interest; adequate Procedures for

collecting statements; additional financial information reported

on the statements to help enforce statutory prohibitions; andgreater assurance that assistant national bank examiners, who

are not required to file statements, do not hold interests that

violate statutory and/or administrative pFohibitions.Recommendations: The Comptroller of the Currency should: require

national bank examiners to file annual financial disclosurestatements; develop specific criteria for identifying positions

and employees who should file statements and apply those

criteria to all positions; develop consistent and comprehensivewritten regulations encompassing the various restrictions placed

on employees' interests by Federal regulations; developcomprehensive guidelines for employees as to the types of

interests that are prohibited; develop and maintain a listing of

all employees required to file statements and obtain approval as

needed from the Department of the Treasury and the Civil Service

Commission; revise the disclosure statement to requiredisclosure of employee loans and bank credit cards; develop

procedures to insure that stateievts are properly and promptlycollected; require assistant national bank examiners to updateannually financial information on indebtedness and ownership of

national bank stock; and review the questionable interests and

take appropriate corrective action. (Author/QH)

CDREPORT TO TTHLE CONGRESS

t.1- KBY THE CO)MPT7ROLLER G(E NERAL,. " -OF THE UNITED ST7'A TES

Financial Disclosure Systems InBanking Regulatory AgenciesThe Office of the Comptroiler of the Currency

Because of its supervisory involvement withthe national banking industry, the Office ofthe Comptrol'er of the CUurrency must makesure that the financial dsciosure system forits employees effectively identifies and re-solves potential cu,,flict-of-interest situations.

This report highlights several problems withthe financial disclosure system and discussesthe agency's plans lor improving it.

FPCD-77-29 A 1 9 7 7

COMPTROLLER GENERAL OF THE UNITED STATES

WASHINGTON, D.C. 20548

B-118535

To the President of the Senate and the

Speaker of tne House of Representatives

Executive Order 11222 prescribes standards of ethical

conduct for Government officials and directs the Civil

Service Commission to establish guidelines for agency

financial disclosure systems. This report discusses the

financial disclosure system in the Office of the Comptroller

of the Currency.

We made this review at the reauest of the Chairman,

Subcommittee on Commerce, Consumer and Monetary Affairs,

House Committee on Governrlent Operations.

As instructed by the Chairman, we did not obtain formal

agency comments. However, the report was discussed with the

Chief Counsel and the Associate Deputy Comptroller who are

responsible for the financial disclosure system. Their

comments were included in the report.

We are sending copies of this report to the Secretary of

the Treasury and the Acting Comptroller of the Currency.

Comptroller Generalof the United States

COMPTROLLER GENERAL'S FINANCIAL DISCLOSURE SYSTEMSREPORT TO THE CONGRESS IN BANKING REGULATORY AGENCIES

The Office of the Comptrollerof the Currency

DIGEST

Having continuous and direct involvement withthe organization, operation, regulation, andsupervision of national banks, the Office ofthe Comptroller of the Currency must make surethat its employees maintain the highest ethicalstandards when doing their work. An effectivefinancial disclosure system can help Vrovidesuch assurances. However, the Comptroller hasnot yet developed the disclosure system to thatpoint.

The financial disclosure system needs

--adequate criteria for identifying posi-tions where incumbents should filefinancial disclosure statements;

--effective procedures with adequatecriteria for reviewing statements andidentifying conflicts of interest;

--adequate procedures for collectingstatements;

-- additional financial information re-ported on the statements to help en-force statutory prohibitions; and

-- greater assurance that assistant nationalbank examiners, who are not required tofile statements, do not hcld interests thatviolate statutory and/or administrativeprohibitions. (See p. 7,)

The Office of the Comptroller's regulationsrequire employees at the Grade 13 level andabove, who have decisionmaking responsibilitiesto submit confidential financial statements ofemployment and financial interests.

T Seh Upon removal. the reorto.- date rshould b roted hereon.

i FPCD-77-29

Because the Office's criteria was not specific

enough, incumbents in 39 positions had jobs

that affected the national banking industry,

but were not required to file disclosure state-

ments. Approximately 730 of the incumbents

were national bank examiners in Grades 11 to

15 positions. Currently, only 84 of 2,700employees must file statements. There may be

many other employees who should be required to

file. (See pp. 7 to 9.)

This report recommends a series of steps the

Office of the Comptroller can take to improve

its financial disclosure system. (See p.16.)

Although the Comptroller did not have an

opportunity to submit formal comments on this

report, the findings and recommendations were

discussed with officials responsible for the

financial disclosure system. The officials

advised GAO that on February 14, 1977, the

Comptroller submitted a revised list of posi-

tions to the Secretary of the Treasury for

approval. This new list further expanded the

prior list of positions required to file to

include attorneys, assistant and national bank

examiners, and assistant, associate and nationaltrust examiners regardless of grade level. He

also identified those employees at both the

Washington and regional levels who are required

to file. The revised list is currently awaiting

Treasury approval. (See app. I.)

In addition, in oviding updated information

on the current satus of implementing GAO's

recommendations, the same officials advised

that the Comptroller is taking steps, in some

cases, that go beyond the scope of GAO's recom-

mendations. (See pp. 17 to 19.) In response to

each of GAO's recommendations, agency officials

provided us with the following information.

1. They agreed that national bank examinersshould be required to file annual finan-

cial disclosure statements and haverequested their inclusion in the list of

positions in the February 14 letter to

Treasury. (See app. I.)

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2. They have expanded the list of positionsby applying criteria refined from Treasuryregulations to the new organization andspecific needs of the Office of theComptroller of the Currency.

3. They are currently in the process of final-izing a revision to Administrative Circular

53 which will contain in addition to theComptroller's expanded guidelines, a compre-hensive compilation of the statutory and

regulatory restrictions placed on employees'interests.

4. The revised Administrative Circular 53 willbe supplemented periodically with lists of

national bank affiliates and abstracts ofinternal rulings on individual cases.

5. They have developed a new list of employeesrequired to file disclosure statements and

are currently awaiting Treasury approval,

6. An expanded financial disclosure statementis currently being drafted. Upon comple-tion, Treasury and Civil Service Commissionapproval will be requested.

7. Procedures have been developed at both the

Washington and regional levels to processand review the financial disclosure state-ments.

8. They have requested Treasury approval toinclude assistant national bank examinersand assistant and associate national trustexaminers in the list of expanded positions.

9. Most of the individual cases cited in thereport have been resolved.

TIar Sh iii

Contents

DIGEST

CHAPTER

1 INTRODUCTION 1Scope of review 2

2 FINANCIAL DISCLOSURE REQUIREMENTSAND AGENCY PROHIBITIONS 4

Agency regulations 4Statutory prohibitions 5

3 IMPROVED POLICIES AND PROCEDURESWOULD INCREASE SYSTEM EFFECTIVENESS 7

More employees should file 7Statement review criteria 9Procedures for collecting

statements 11More information should be

requested on statements 12Information needed fromassistant national bankexaminers 12

4 REVIEW OF FINANCIAL DISCLOSURE STATE-MENTS 14

5 CONCLUSIONS, RECOMMENDATIONS, AND AGENCYCOMMENTS 16Conclusions 16Recommendations 16Agency comments 17

APPENDIX

I Letter dated February 14, 1977, fromthe Acting Comptroller, Office ofthe Comptroller of the Currency 20

II Reports iss )n agencies' financialdisclosure stems 23

III Principal officials of the Departmentof Treasury responsible for adminis-tering activities discussed in thisreport 76

AB REVIATIONS

CSC Civil Service Commission

GAO General Accounting Office

OCC Office of the Comptroller of the Currency

CHAPTER 1

INTRODUCTION

The Office of the Comptroller of the Currency (OCC) Wiascreated in 1863 to establish and regulate a national bankingsystem. The national banking laws (12 U.S.C. I et seq.)give the Comptroller of the Currency the responsibility forexecution of laws relating to organization, operation, regu-lation, and supervision of national banks. National banksare commercial banks chartered by the Federal Government.

As adm:nistrator of national banks, t'-- Comptroller'sprimary responsibility is to make sure that each nationalbank is soundly operated and that the national system fillsthe public need for commercial banking services. Approvalof the Comptroller is required for establishment of newnational banks, conversion of State-chartered banks intonational banks, consolidations or mergers of banks where theresulting bank is a national bank, and establishment ofbranches by national banks.

The Comptroller issues rules and regulations governingthe corporate structure of national banks and their lendingand investment practices. General banking laws are inter-preted by the Comptroller, who is represented by OCC attorneysin court proceedings involving the official responsibilitiesof the office.

The Comptroller supervises national banks through astaff of examiners located in 14 regions throughout thecountry. Examiners visit each bank periodically to evaluateits financial condition and soundness of management. Toachieve this, examiners evaluate a bank's investment and loanportfolios, appraise assets and management, and determinecompliance with applicable banring laws and interpretiverulings of the OCC. Examiners consult with bank managers toreview their findings and prepare a report of examinationfor each bank. When the Comptroller determines that a na-tional bank is insolvent, he appoints the Federal DepositInsurance Corporation (FDIC) as receiver.

OCC is a bureau of the Department of the Treasury.The Comptroller, who operates under the general directionof the isecretary of the Treasury, is appointed by thePresident and confirmed by the Senate for a term of 5 years.

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The Comptroller and his employees have continuous directand indirect involvement with bankers and the confidentialinformation available in the national banking system.

SCOPE OF REVIEW

Our review was conducted at OCC headquarters, Washington,D.C., pursuant to a request from the Chairman, Subcommitteeon Commerce, Consumer and Monetary Affairs, House Committeeon Government Operations. We were asked to determine whetherselected Federal agencies which regulate federally charteredor insured depositary institutions have effective financialdisclosure systems to identify and resolve conflict ofinterest situations. The Chairman's primary concerns werewhether

-- all required financial disclosure statements werepromptly and properly file,';

-- financial disclosure statements were adequatelyreviewed; and

-- positions not currently required to file finan-cial disclosure statements should be requiredto file them.

Our review was limited to the financial reporting system forfull-time employees.

We reviewed all financial interests listed by OCCemployees who had filed a 1976 financial disclosure state-ment by October 28, 1976, at OCC headquarters. We alsoreviewed the financial disclosure statements of the formerComptroller of the Currency who was required to file astatement directly with the Civil Service Commission (CSC).We did not contact employees to discuss their interestslisted on the statements or actual duties and responsibilities.

The confidentiality of these statements was maintainedat all times. Cur working papers do not associate employees'names with financial interests listed on the statements butshow only codes which are traceable to the names of employeesand their interests. Lists of the employees and our codes werereturned to OCC at the completion of our audit.

We also reviewed 57 descriptions of positions whose in-cumbents were not required to file financial dis,,losure statp-mer.ts to determine whether they should be required to filebecause of their duties and re.ponsibilities. The descrip-tions had been drafted in accordance with organizationalchanges resulting from a recent management study of OCC.

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Although they had not been formally approved, we wereadvised that they described actual duties better than theofficial descriptions.

This is the first in a series of three reports con-cerning the financial disclosure systems of the Federalbanking regulatory agencies. We are also reviewing, andwill report on, the financial disclosure systems of theFederal Deposit Insurance Corporation and the Board ofGovernors of the Federal Reserve System.

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CHAPTER 2

FINANCIAL DISCLOSURE REQUIREMENTS

AND AGENCY PROHIBITIONS

Executive Order 11222, dated May 8, 1965, prescribedstandards of ethical conduct for Government officers andemployees. The CSC was directed by the order to establishimplementing regulations. In November 1965, CSC issuedinstructions requiring each agency to prepare employeeconduct standards and establish a system for reviewingemployee financial disclosure statements. Standards ofconduct regulations established by each agency must beapproved by CSC.

CSC requires each top agency official to obtain state-ments of outside employment and financial interests from:

-- Employees paid at a level of the ExecutiveSchedule in subcnapter II of chapter 53 oftitle 5, United States Code.

-- Employees classified at Grade-13 or above,who are in decisionmaking positions or haveduties which could involve conflict-of-interest situations. Included are positionsinvolving decisions or actions which have aneconomic impact on any non-Federal enterprise.

--Employees classified below Grade-13 who occupypositions otherwise meeting the above criteria.An agency must obtain CSC approval to reqgiresuch employees to file.

Interests of a spouse, minor child, or other member(blood relation) of an employee's immediate household areconsidered the employee's interests.

AGENCY REGULATIONS

In April 1966 the Department of the Treasury issuedregulations 31 Code of Federal Regulations part 0. Theseregulations described minimum standards of conduct for itsemployees and established the financial disclosure systemfor all Department employees. The regulations require JCCemployees in certain designated positions to file on forms

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prescribed by the Department, statements of employment andfinancial interests. The General Counsel was designated asthe Treasury Counselor on standards of conduct, responsiblefor coordination of the counseling service within theDepartment and for interpretations on conflict-of-interestquestions. The Chief Counsel or legal advisor for eachBureau was designated as the Deputy Counselor for the Bureau,responsible for providing advice and guidance on conflictsof interest and other matters pertaining to standards ofconduct.

At OCC, an associate deputy comptroller is responsiblefor collecting and reviewing financial disclosure statements,except from some senior attorney positions. Attorneys inGrade-15 and above are required to file statements with OCC'sChief Counsel who is responsible for reviewing the statements.The statements of the senior attorneys are then filed with theGeneral Counsel of the Treasury Department.

Statements are required from persons in covered posi-tions within 30 days after entrance on duty, and must beupdated annually. If no changes occur, a negative reportmust be filed.

When conflict-of-interest matters can not be resolvedat OCC, the matter is referred to Treasury's General Counsel.If the financial interests conflict or appear to conflictwith the employee's official responsibilities, remedialaction, including changes in assigned duties, disqualifi-cation for particular assignments, divestiture of the con-flicting interest, or disciplinary action, may be taken.

Newly appointed bank examiners are reqiired initiallyto complete statements different from the annual statementsdescribed above, disclosing outstanding indebtedness to anational bank or affiliate, ownership in national bank stockor in a holding company affiliate, and listing all assets,liabilities, and other financial interests he or his familyholds. Unless an examiner achieves a position requiring thefiling of annual financial disclosure statements, periodicfollowup statements are not required.

STATUTORY PROHIBITIONS

It is unlawful for an officer, director, or employeeof any bank that is a member of the Federal Reserve Systemor that has deposits insured by the Federal Deposit InsuranceCorporation, which includes national banks, to make a loan to

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any Government examiner "who examines or has authority toexamine such a bank" (18 U.S.C. 212).

A national bank examiner or an assistant national bankexaminer is prohibited by 18 U.S.C. 213 from accepting aloan or gratuity from any bank, corporation, association,or organization examined by him, or from any person connectedtherewith.

OCC's administrative circular 53, amended April 22,1974, adopted these statutory restrictions as policy restric-tions and made them applicable to all personnel, includingregional administrators, deputy regional administrators, andregional counsels involved in any decisionmaking or policy-setting process. The guidelines provide that neithernational bank examiners noi policy-setting personnel may seekor obtain a loan or any extension of credit from a nationalbank, and that they may use only bank credit cards issuedby State banks or where the credit involved is extended bya state bank. Provisions for liquidation of employee loansare made in accordance with the original payment schedulewhen (1) a State bank converts to a national bank and (2) anewly appointed employee has a loan from a national bank.

The Comptroller and the Deputy Comptrollers of the Cur-rency are prohibited by 12 U.S.C. 11 from having any interestin any association issuing national currency under the laws ofthe United States. According to an OCC official, administra-tive circular 53 extends these provisions to employees in pol-icymaking or decisionmaking positions. The circular's provi-sions prohibit an examiner or policysetting employee from hold-ing title to any security of a national bank or a one-bankholding company, if a national bank is the principal businessof that holding company.

The Comptroller's Handbook of Examination Procedurealso contains certain restrictions on employee loans andownership of stock.

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CHAPTER 3

IMPROVED POLICIES AND PROCEDURES WOULD

INCREASE SYSTEM EFFECTIVENESS

OCC's financial disclosure system generally complieswith CSC and Department of the Treasury regulations. However,we found that the design and operation of the system couldbe improved to make it more effective. These improvementsinclude

-- identifying positions whose incumbents should filefinancial disclosure statements,

--reviewing statements and identifying conflicts ofinterest,

-- improving procedures for collecting statements,

--otbaining financial information cn the disc isureforms necessary to enforce statutory prohiL_cions,and

-- insuring that assistant national bank examiners whoare not required to file statements do not hold in-terests that violate statutory and/or administrativeprohibitions.

Such initiatives by OCC could aid in the overall man-agem nt of the system and increase its effectiveness.

MORE EMPLOYEES SHOULD FILE

Treasury regulations provide that persons required tofile financial disclosure statements include those classi-fied at Grade-13 or above, in specifically identified posi-tions, who are responsible for making decisions or takingactions on the part of the Government concerning

--contracting or procurement,

--administering or monitoring grants or subsidies,

--regulating or auditing non-Federal enterprises, and

-- participating in other activities where the decisionhas an economic impact on the interests of any non-Federal enterprise.

7

The regulations require statements to be filed by em-ployees below the Grade-13 level, if their duties are suchthat filing a statement is necessary to avoid a possibleconflict-of-interest situation. Each bureau has the respon-sibility for determining the positions required to filestatements based on the above reaulations.

Currently, OCC requires 84 employees out of 2,700 tofile annual financial disclosure statements. To determinethe adequacy of OCC's criteria for identifying positionswhose incumbents should file financial disclosure statements,we reviewed 57 position descriptions whose incumbents wereboth above and below the Grade-13 level that currently do notfile statements. These positions were in the offices of theComptroller, the deputy comptrollers, and in other headquar-ters and field offices. In our opinion, incumbents in 39 ofthe 57 positions should have been required to file as theyperform duties which influence OCC policy and regulatoryactivities, and have access to privileged information. These39 positions included

-- national bank examiners,

--attorneys,

--economists and statisticians,

--regional corporate directors,

--financial analysts,

--directors responsible for bank organization andstructure, and

-- assistants to the Comptroller.

The position descriptions indicated that these employ-ees assist in bank supervision, resolve complex legalquestions, identify financial trends and changing businessconditions that have an impact on national banks, analyzethe condition and performance of national banks and adviseon bank mergers and charters.

National bank examiners

There are approximately 730 national bank examinersin Grades-ll to -15 positions who are not required to file.Depending on grade level and experience, a national bankexaminer may be responsible for managing examinations of

8

small end medium-sized banks, or serving as examiner-in-charge for reviews of the most sophisticated and complexnational banks and their affiliates.

A national, bank examiner's responsibilities may include:

-- Planning and organizing an examination; supervisingsubordinates; and evaluating the adequacy of operations.financial condition, management, earnings, and futureprospects of a bank.

-- Supervising and conducting highly sensitive and complexfield investigateLns pertaining to charter and mergeractivities of new and existing national banks, andrecommending action to be taken on specific applica-tions.

-- Advising bankers on OCC laws, regulations, and rulings.

--Investigating sensitive crininal or consumer com-plaints.

Much of the information collected or reviewed during theexaminations is highly confidential to both the bank u.derexamination and its customers.

On the basis of our review of the 57 position descrip-tions, we believe OCC should develop more specific criteriafor identifying positions whose incumbents should file state-ments, and use this criteria in evaluating all OCC positions.On the basis of their duties and responsibilities, and theiraccess to highly confidential information, we believe allnational bank examiners should be required to file annualfinancial disclosure statements.

STATEMENT REVIEW CRITERIA

OCC had not developed adequate review guidelines or alist of prohibited securities for its reviewing officers tofollow. The review guidelines centered only on identifyingbank-associated interests and did not relate the employees'assigned responsibilities to financial holdings.

In addition, OCC's guidelines do not describe what po-tential conflicts, if any, may exist when employees haveinterests in

-- mutual funds, trusts, or pension plans;

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--nonbank companies which may be major suppliers of thebanking industry;

-- businesses, owned wholly or in part by OCC employees,which may borrow from national banks; and/or

-- competing organizations such as State banks.

We found several of these types of interests in our reviewof employees' holdings. (See ch. 4.)

OCC's law department has ruled on individual cases con-cerning these matters. However, OCC has not circulated ab-stracts of these rulings or any resulting general policy toits employees. Lacking such guidelines, OCC employees couldinadvertently hold interests or be involved in situationsthat conflict or appear to conflict with their duties andresponsibilities.

Also, there are no agency guidelines other than adminis-trative circular 53 and Treasury regulations designatingwhat constitutes a conflict; therefore, the OCC AssociateDeputy Comptroller has little basis for questioning reportedfinancial interests and relationships. OCC should developa written policy by which these interests can be fully re-ported and examined. The Associate Deputy Comptroller ad-vised us that these matters were being considered by thoseformulating new policy.

Restrictions on stock ownershi

Restrictions on stock relationships which appear in theComptroller's Handbook of Examination Procedure are incon-sistent with the restrictions in administrative ciicular 53.The Comptroller's Handbook prohibits OCC examiners fromowning stock in a national bank, a corporation holding thecontrol of a national bank, or a national bank affiliate(for example, a bank's subsidiary or a business entity underthe bank's holding company).

On the cther hand, the administrative circular 53 andthe instructions concerning the disclosure of informationinitially filed by new employees in bank examiner positionsprohibit owning stock in a national bank, or a one-bank hold-ing company, only if a national bank is the principal busi-ness of that holding company.

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The associate deputy comptroller advised us that therestrictions in administrative circular 53 are the ones ineffect. However, we believe the criteria should be madeconsistent. OCC officials told us that the Handbook wascurrently the subject of a substantial revision. The finalversion, which will be issued in March 1977, will not con-tain any references to conflict-of-interest restrictions orguidelines. All such information will be centralized inthe Comptroller's Administrative Circular Series.

Restrictions concerning loans

OCC's administrative circular 53 extended the statutoryloan restrictions of 18 U.S.C. 212 and 213 as policy restric-tions applicable to all OCC personnel involved in any deci-sionmaking or policy-setting process. OCC employees areinformed of the loan restrictions through administrativecircular 53 and the Comptroller's Handbook of ExaminationProcedure. However, the instructions are minimal. TheHandbook mentions only that loans are permitted from Statebanks not affiliated with national banks. The circular givesno guidance regarding employee business loans from nationalbanks, or what loans, if any, are permitted from State banksaffiliated with a national bank. OCC has prepared draftmemorandums formulating more complete and consistent guide-lines concerning loans, but these nie not been finalized.

PROCEDURES FOR COLLECTING STATEMENTS

OCC positions that are required to file annual disclo-sure statements are supposed tc be included in appendix A ofthe Department of the Treasury "Minimum Standaras of Conduct"published in the Federal Register. Currently, there are 12OCC positions listed in appendix A, reauiring statements from62 employees. OCC, in determining who should file disclosurestatemer's in 1976, required 84 employees to file.

In August 1976 the Department of the Treasury issuedLegal Division Directive No. 7 setting forth the manner inwhich legal division attorneys located in all Bureausthroughout Treasury would be required to file. Under thedirective all OCC attorneys Grade 15 and above were requiredto file disclosure statements with OCC's Chief Counsel. Someof these attorneys had already been required to file state-ments with the Associate Deputy Comptroller. These attorneys,and 11 other attorneys not previously reauired to file, sub-mitted their statements to the Chief Counsel. We did notreview the statements of the 11 attorneys as the filing andreview of these statements was completed after our audit.

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OCC did not adequately enforce regulations requiringindividuals hired or promoted into filing positions tosubmit a statement within 30 days of entering the position.One employee entered into a position in 1970, but did notfile his first statement until 1976. Twelve other employeesfiling in 1976 for the first time, did not file within 30days of appointment. The average time for filing of the 12statements was 8 months after appointment.

Some of the confusion concerning OCC's statement collec-tion procedures can be traced to a recent reorganizationwithin OCC, including the changing and revision of positions,titles, and responsibilities. However, the lack of effectivecontrols and procedurns to insure proper and timely submis-sion of statements could :rsult 1i, employees holding conflict-ing interests for extended periods of -:me.

MORE INFORMATION SHOULD BEREQUESTED ON STATEMENTS

OCC needs information concerning employee loans and bankcredit cards in order to enforce its Statutory prohibitionsand agency regulations. The disclosure statement prescribedby Treasury Department regulations specifically exempts theemployee from reporting loans for home mortgages and forordinary household and living expenses. Also, informationis not requested concerning employee use of credit cardsissued by national banks.

According to the Associate Deputy Comptroller, OCC isconsidering revising its disclosure statement to cover theAgency's particular needs, including personal borrowing andcredit cards. Revisions such as these, which add to thedisclosure requirements, must be approved by CSC.

INFORMATION NEEDED FROM ASSISTANTNATIONAL BANK EXAMINERS

18 U.S.C. 213 prohibits a national bank examiner or anassistant national bank examiner from accepting a loan orgratuity from any bank, corporation, or association examinedby him, or from any person connected therewith. To enforcethis prohibition and other OCC regulations, OCC requiresemployees hired into examiner positions, at the time oftheir appointment, to disclose information concerning thoserelationships they may .ve with national banks. However,this information is not updated periodically.

Procedures have not been established for examiners toreport subsequent acquisitions of national bank stock or

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other financial relationships which may represent a conflictof interest or the appearance of a conflict. We were toldthat sucn information is expected to be reported by examinersas the need arises.

While we have seen a need for all national bank exam-iners to file annual financial disclosure statements, we De-lieve that assistant national bank examiners (Grades-5 to -10)should be required, at a minimum, to update annually informa-tion on indebtedness and ownership of national bank stocks.This would provide greater assurance to OCC that statutoryprovisions and regulations were being followed. There areapproximately 1,000 assistant national bank examiners whoaid in all phases of the bank examination process.

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CHAPTER 4

REVIEW OF FINANCIAL DISCLOSURE STATEMENTS

We reviewed the financial disclosure statements of the84 employees OCC required to file in 1976. OCC reviewedtheir financial disclosure statements twice in 1976. Thefirst review, by OCC's former personnel director, occurredshortly after the statements were filed, starting in April1976. In October 1976 during an OCC reorganization, theAssociate Deputy Comptroller performed a second review ofthe statements. During the latter review the financialinterests of three employees were questioned. These inter-ests had been reported for many years.

-- The first employee reported in 1971 that hisminor son held stock in a national bank. His1976 statement reported no change from pre-vious statements. When OCC questioned theemployee concerning his son's interest, theemployee stated that the stockholder was nolonger a minor, or a member of the employee'shousehold.

-- An OCC division director had a business loanfrom a national bank at the same time that hisduties required him to (1) explain and inter-pret OCC financial reporting regulations tobank officials, (2) supervise the collection,review and compilation of data from nationalbank financial rtatements, and (3) implementdisclosure procedures for bank reports underthe Freedom of Information Act. OCC's lawdepartment has recommended divestiture of theloan.

--A high-level OCC official has accumulatedduring the past 15 to 20 years more than1,000 shares of stock in a family-operatedState bank, representing 6.5 percent of thetotal shares outstanding. His duties include(1) regulating conversions of State banksinto national banks and supervising mergers,charters, and branch applications and (2)monitoring bank exaninations. He can have agreat imnpact on the national banking industry.

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OCC's law department has considered this caseand ruled that the employee may retain hisstock but must not participate in any matterconcerning any national bank or State banklocated within 100 to 200 miles of the Statebank in which the employee has a stock interest.

During our review of the 84 statements, we noted thatfive OCC employees reported financial interests which may bequestionable.

-- An OCC official whose duties include dealingwith OCC policies on electronic banking, ownsstock in a company which, as a major part of itsbusiness, produces electronic storage and infor-mation retrieval equipment and leases it to thebanking industry. The official has agreed todispose of the stock.

--An OCC official has for 6 years reported stock-holdings by his wife in a financial corporationwhich she inherited from her father's estate in1968. At the time of the inheritance, thecorporation did not own a national bank. Sub-sequently, the corporation acquired 100 percentof a national bank. As part of his officialduties, he informs the banking community ofOCC policies and actions, responds to press andpublic inquiries, and advises the Comptrollerconcerning the effect of OCC actions. He hasrequested a ruling from the OCC law departmenton the propriety of the holdings.

-- Three other employees had loans from Statebanks affiliated with national banks in theregions in which they were employed. The Statebanks and national banks were under commonholding companies. OCC is currently revisingadministrative circular 53 to prohibit employ-ees from having loans with banks affiliatedwith national banks.

Our review of the former Comptroller oL the Currency'sfinancial disclosure statement showed no interests which, inour opinion, raised possible conflict of interest problems.The statement of the current Acting Comptroller of theCurrency was filed with the OCC Associate Deputy Comptrollerand likewise contained no interests which raise possibleconflict-of-interest problems.

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CHAPTER 5

CONCLUSIONS, RECOMMENDATIONS,

AND AGENCY COMMENTS

CONCLUSIONS

As the regulator of the national banking industry, OCCmust insure that its financial disclosure system effectivelyidentifies and resolves employee conflicts of interest.Because of its close working relationship with the bankingindustry, OCC must protect itself and its employees frompossible conflicts of interest resulting from the financialinterests held by employees.

OCC has not developed its disclosure system to the pointwhere it is fully effective. Review guidelines and criteriafor determining employee conflicts of interest are insuffi-cient, and collection procedures need strengthening. Manyemployees in important positions were not required to filedisclosure statements, but their duties and responsibilitiesindicated that they should be required to file. Certain in-formation necessary to enforce statutory prohibitions andagency regulations was not being requested on the disclosureform, and persons hired into bank examiner positions, whoare not required to file statements annually, were not beingrequired to keep this information current.

OCC has shown initiative to improve the effectiveness ofits system. However, the system must be completed and formal-ized into one cohesive set of regulations and guidelines. Ofprimary importance is the need for OCC to identify fully allpositions that should file statements and request Departmentof the T easury and CSC approval. Until this is done, webelieve that OCC cannot satisfactorily assure itself that allpotential conflict-of-interest situations within its agencyare being identified and resolved.

RECOMMENDATIONS

We recommend that, to improve the effectiveness of theuCC financial disclosure system, the Comptroller of theCurrency:

--Require employees in national bank examinerpositions to file anrual financial disclosurestatements.

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-- Develop specific criteria for identifyingpositions and employees who should filestatements and apply that criteria to allpositions.

--Develop consistent and comprehensive writtenregulations encompassing the various restric-tions placed on employees' interests bystatutory regulations, Executive Order 11222,and Department of the Treasury and OCC regula-tions and policies.

--Develop comprehensive guidelines for employeesas to the types of interests that are prohib-ited, including interests in mutual funds,trusts, pension plans, stock in bank-relatedcompanies, business loans, and bank competitors.Such guidelines might also contain lists ofprohibited securities.

--Develop and maintain a listing of all employeesrequired to file disclosure statements andobtain approval as needed from the Departmentof the Treasury and CSC.

-- Revise the financial disclosure statement torequire disclosure of employee loans and bankcredit cards.

--Develop procedures to insure that statementsare properly and promptly collected.

-- Require employees in assistant national bankexaminer positions to update annually financialinformation on indebtedness and ownership ofnational bank stock.

-- Review the questionable interests identified inthis report and take appropriate correctiveaction.

AGENCY COMMENTS

We discussed our findings and recommendations with OCCofficials in the Offices of the Chief Counsel and theAssociate Deputy Director who are responsible for the finan-cial disclosure system. They concurred with our findingsbut found it necessary in several instances to suggest cer-tain clarifications and to correct some minor inaccuracies.

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They also thought it beneficial to provide us with updatedinformation as to the current status of plans for improvingthe financial disclosure system. As a result, we revisedour report where warranted to reflect these facts moreaccurately.

OCC officials agreed that full indentification of allemployees required to file disclosure statements is ofprimary importance. For this reason, OCC by letter ofFebruary 14, 1977, requested approval of a fully expandedlist of positions and informed Treasury of its intention torequest Treasury and Civil Service Commission approval ofan expanded statemeznt of employment and financial interestsfor OCC employees. (See app. I.)

In response to each of our recommendations, OCC offi-cials provided us with the following information.

1. They agreed that national bank examinersshould be required to file annual financialdisclosure statements and have requestedtheir inclusion in the list of positionsin the February 14 letter to Treasury.

2. They expanded the list of positions byapplying criteria refined from Treasuryregulations to OCC's new organization andspecific needs.

3. They are currently in the process of final-izing a revision to Administrative Circular53 which will contain, in addition to theComptroller's expanded guidelines, a compre-hensive compilation of the statutory andregulatory restrictions placed on employees'interests.

4. The revised Administrative Circular 53 willbe supplemented periodically with lists ofnational bank affiliates and abstracts ofinternal rulings on individual cases.

5. They developed a new list of employeesrequired to file disclosure statements andare currently awaiting Treasury approval.

6. An expanded financial disclosure statementis currently being drafted. Upon comple-tion, Treasury and Civil Service Commissionapproval will be requested.

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7. Procedures have been developed at both theWashington and regional levels to processand review the financial disclosure state-ments.

8. They requested Treasury approval to includeassistant national bank examiners andassistant and associate national trustexaminers in the list of expanded positions.

9. Most of the individual cases cited in thereport have been resolved.

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APPENDIX I APPENDIX I

Comptroller of the CurrencyAdministrator of National Banks

VWashington. D.C. 20219

February 14, 1977

Mr. Warren F. BrechtAssistant Secretaryfor Administration

Department of the TreasuryWashington, D.C. 20020

Dear Mr. Brecht:

Pursu_. Lo 31 C.F.R. S0.735-70(e), I hereby request that thelist of Positions in Appendix A to 31 C.F.R. Part 0 includedunder the heading "Office of the Comptroller of the Currency"be revised to read as follows:

First Deputy Comptrollers.Deputy Comptrollers.Associate Deputy Comptrollers.Assistants to the Comptroller.Chief Counsel.Deputy Chief Counsel.Attorneys.Division Directors and Deputy Directors (regardless ofsoecific title).

Procurement Officer.Regional Administrators.Deputy Regional Administrators.Assistants to Regional Administrators.Regional Counsels.Regional Division Directors and Deputy Directors (regardlessof specific title).

Regional Economists.National Bank Examiners.Assistant National Bank Examiners.National Trust Examiners.Associate National Trust Examiners.AsEistant National Trust Examiners.

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APPENDIX I APPENDIX I

-2-

The revision of the lis: of positions in Apendix A is partof an ongoing internal reevaluation of our standards ofconduct and conflicts f- interest policies. The Drimarypurpose in revising t-:e list of positions is to expand thelist to include additional employees who previously had notbeen covered. The revision also identifies with greaterspecificity those employees at both the Washington andRegional levels who are required to file and conforms thelist of positions to recent organizational changes withinthe Office.

Because the amended list extends to employees who are classifiedbelow a Grade 13, Treasury regulations require that suchinclusion be "specifically justified by the Secretary of theTreasury in writing to the Civil Service Commission as anexception that is essential to protect the integrity of theGovernment and avoid employee involvement in a possibleconflicts of interest situation." 31 C.F.R. SO0.735-70(d).The positions which include employees below a Grade 13 areas follows:

Attorneys.National Bank Examiners.Assistant National Bank Examiners.National Trust Examiners.Associate National Trust Examiners.Assistant National Trust Examiners.

The inclusion of employees classified below a Grade 13 wasnecessary in order to disclose any possible conflicts ofinterest by those individuals who are most directly involvedin the examination and supervision of national banks andnational bank affiliates. It is our opinion that theinclusion of those employees who have direct contact withnational banks is essential in maintaining the high standardof integrity and impartiality that this Office requires inmeeting its statutory responsibilities. Accordingly, werequest that the appropriate communication be forwarded byTreasury to the Civil Service Commission.

We would appreciate approval by Treasury of the revised listof positions, in accordance with 31 C.F.R. 9 0.735-70(e), aspromptly as possible. Upon being advised of such approval,actual notification will be given to those employees who arerequired to file under the revised list.

You should also be aware that we are presently in the processof revising the statement of employment and financial interestscurrently being u;ed by our Office. The present statement,Treasury Departmelt Form No. 3087, has been found to be inadequatein certain respects in meeting the specific needs of our

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APPENDIX I APPENDIX I

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conflicts of interest policy. The purpose of the revisioi will beto expand the current statement to include questions regardingloans from national banks and national bank affiliates as well asquestions concerning stock held in national and state banks andtheir affiliates. Because the revised statement will includequestions that go beyond, or are in greater detail than, thoseincluded in the Civil Service Commission's format, Treasuryregulations reqt:re the prior approval of the Commission. 31C.F.R. S 0.735--73. The revised statement will be submitted to youupon completion along with a request that the Cornmmssion's approvalbe obtained.

If you have any question concerning this Office's policies orpractices in regard to standards of conduct or conflicts of interest,please contact Mr. John E. Shockey, Chief Counsel.

Very truly yours,

Robert BloomActing Comptroller of the Currency

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APPENDIX II APPENDIX II

REPORTS ISSUED ON AGENCIES'

FINANCIAL DISCLOSURE SYSTEMS

Report title, number,Agency and issue date

Federal Power Commission Need for Improving the Regula-tion of the Natural Gas Indus-try and Management of InternalOperations, B-180228, 9/13/74.

U.S. Geological Survey Effectiveness of the FinancialDisclosure System for Employeesof the U.S. Geological Survey,FPCD-75-131, 3/3/75.

Civil Aeronautics Board Effectiveness of the FinancialDisclosure System for CivilAeronautics Board EmployeesNeeds Improvements, FPCD-76-6,9/16/75.

Federal Maritime Commission Improvements Needed in theFederal Maritime Commission'sFinancial Disclosure Systemfor Employees, FPCD-76-16,10/22/75.

U.S. Railway Association Improvements Needed in Procure-ment and Financial DisclosureActivities of the U.S. RailwayAssociation, RED-76-41, 11/5/75.

Department of the Interior Department of the Interior Im-proves Its Financial DisclosureSystem for Employees, FPCD-75-167, 12/2/75.

Food and Drug Administration Financial Disclosure System forEmployees of the Food and DrugAdministration Needs Tighten-ing, FPCD-76-21, 1/19/76.

U.S. Geological Survey Letter report to CongressnanJohn Moss on U.S. GeologicalSurvey Employees' Divestiture,FPCD-76-37, 2/2/76.

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APPENDIX II APPENDIX II

Report title, numberAgency fand issue date

Inter-American Foundation Inter-American Foundation'sFinancial Disclosure System forEmployees and Its ProcurementPractices, ID-76-69, 6/30/76.

Federal Aviation Problems with the FinancialAdministration Disclosure System, Federal

Aviation Administ ration,FPCD-76-50, 8/4/76.

Department of Commerce Problems Found in the FinancialDisclosure System for Depart-ment of Commerce Employees,FPCD-76-55, 8/10/76.

Small Business Administration Management Control Functionsof the Small Business Adminis-tration--Improvements areNeeded, GGD-76-74, 8/23/76.

Export-Import Bank Export-Import Bank's FinancialDisclosure System for Employeesand Its Procurement Practice,ID-76-81, 10/4/76.

Federal Communications Actions Needed to Improve theCommission Federal Communications Commis-

sion Financial Disclosure Sys-tem, FPCD-76-51, 12/21/76.

Tennessee Valley Authority Tennessee Valley Authority:Information on Certain Con-tracting and Personnel Manage-ment Activities, CED-77-4,12/29/76.

Food and Drug Administraltion The Food and Drug Administra-tion's Financial DisclosuzeSystem for Special GovernmentEmployees: Progress and Prob-lems, FPCD-76-99, 1/24/77.

Energy Research and An Improved Financial Disclos-Development Administration ure System, FPCD-77-14, 1/26/77.

Department of Agriculture Financial Disclosure Systemfor Department of AgricultureEmployees Needs Strengthening,FPCD-77-17, 1/31/77.

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APPENDIX II APPENDIX II

Report title, numberAgecy ana issue- t '---

The White House Action Needed to Make the ExecutiveBranch Financial Disclosure SystemEffective, FPCD-77-23, 2/28/77.

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APPENDIX III APPENDIX III

PRINCIPAL OFFICIALS

OF THE DEPARTMENT OF THE TREASURY

RESPONSIBLE FOR ADMINISTERING ACTIVITIES

DISCUSSED IN THIS REPORT

Tenure of officeFrom To

SECRETARY OF THE TREASURY:W. Michael Blumenthal Jan. 1977 PresentWilliam E. Simon Apr. 1974 Jan. 1977

COMPTROLLER OF THE CURRENCY:Robert Bloom (acting) Aug. 1976 PresentJames E. Smith July 1973 July 1976

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